This past year included a lot of excitement but not much progress from an economic or stock market perspective. Extraordinary events included the near shut-down of our government; the downgrading of U.S. treasuries from AAA status; the near default of Greece; as well as a highly volatile stock market that could rise or fall several hundred points a day. In the end our economy showed only marginal improvement and the stock market, as measured by the S&P 500 Index, had a 0% return.
So what’s ahead for 2012 and how should you position your portfolio to produce the best results? This is the time of year when market analysts and economists make their predictions for the year ahead. A few will gain ‘fame’ for their uncanny accuracy but the truth is that no one knows or can predict the future. At best we make educated guesses. Think of it as a target being laid on the ground 200 yards away and then 10,000 arrows shot up in the air in the general direction of the target….one or two may very well hit the bulls-eye but it would be a mistake to declare the flinger of that arrow as the greatest archer of our time. Still it’s a lot of fun to make predictions if only to allow your detractors the opportunity to say, “I told you so!” Here are my predictions for 2012:
Stock & Bond Market
· The stock market will rise by double digits. Publicly traded corporations continue to deliver strong earnings and I expect those earnings to rise 10% or more in 2012. Stock prices should follow. Stock prices did not follow earnings this past year but I believe the reason was that events in the U.S. and Europe continued to scare investors away from the stock market.
· U.S. Blue Chip Dividend-Paying stocks will continue to be the ‘sweet spot’ of the stock market. All last year I touted these stocks citing both the quality of their yields and the Baby Boomer retirement dynamics. This turned out to be the bright spot for the stock market last year with returns of 8%-12%. I expect this trend to continue in 2012.
· Little-to-no opportunity in bonds. Bonds have been on a decade-long bull market run. With interest rates hovering near historical lows, I believe there is little opportunity for returns in bonds, CDs or money market accounts. There is a greater risk that interest rates will begin to rise sometime this year, causing bond values to fall. Having said this, some allocation to bonds in your portfolio is a prudent strategy. If there is a big jolt in the stock market, your bonds will tend to help counteract the negative volatility.
Interest Rates
· Interest rates on bonds, CDs and Money Market accounts will remain low. The 10-year treasury is yielding less than 2% while the 30-year treasury is yielding 3%. 5-year CDs are yielding about 2% while most money market accounts are yielding less than 1%. The low interest rate trend will continue throughout 2012, however, at some point, interest rates will begin to rise…maybe this year or next.
· Mortgage rates will remain low. Currently mortgage rates are hovering between 3.25% and 3.75% depending on your credit score and the term of the mortgage you choose. Mortgage rates will remain low but these rates could well mark the bottom.
U.S. Economy
Our economy will continue to improve throughout 2012 but at a very slow pace. Inflation will rise but not at an alarming rate. The housing market is in a five to ten year workout cycle but I expect we have seen the bottom of the housing market and it will continue to improve throughout 2012. Expect the government to intervene with some type of support program…perhaps a rental program for foreclosed mortgages owned by Fanny Mae and Freddie Mac. The unemployment numbers will improve but overall unemployment will remain above 8%.
What should you do to position yourself for financial success in 2012?
· Review your current investment allocation and decide if you are willing to increase your stock allocation. If you are retired or near retirement, be sure to maintain a minimum of three to five years’ worth of living expenses in your fixed income portfolio (bonds, CDs, and money market accounts). Review your stock strategy and consider adding blue chip dividend-paying stocks. You’ll receive nice comparative yields with upside opportunity.
· Compare your mortgage rate to current rates. Would you benefit from refinancing? It’s still a great time to buy a home. Consider whether this year would be a good time to downsize.
· Pay down debt. If you have debts with relatively high interest rates, consider using any cash resources to pay down your most expensive debts.